Results-backed growth underlie Visa and Mastercard

Gross domestic product (GDP) grew 4.9% during the last quarter, above both inflation rates and economist expectations of 4.7%. In various reports, the push higher seems to be credited to a resilient consumer spending trend holding the economy together.

With this in mind, it should be no surprise that the Consumer Discretionary Select Sector SPDR Fund NYSEARCA: XLY has outperformed the broader S&P 500 by as much as 7% year-to-date. All the confidence, momentum and excitement goes to the consumer.

Two underperforming establishments?

Who usually stands in the middle of these exchanges, collecting fees over each transaction? 

Visa NYSE: V and Mastercard NYSE: MA.

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On a year-to-date basis, these two stocks have underperformed the consumer discretionary sector by an average of roughly 9%, meaning that perhaps some market participants have not caught onto the fact that consumer discretionary spending would not be possible without these two names.

For now, the focus is on the third quarter 2023 earnings reports recently laid out by these two companies, where trends come to life in supporting a potential value play for the rest of the year. 

Results-backed growth

As Visa and Mastercard are nearly sister companies, you would not be surprised to see that they reported year-on-year revenue growth rates of 10.6% and 11%, respectively. The difference between the two reports comes from the bottom line.

While Visa reported earnings per share growth of 21%, Mastercard came in for the win at an impressive 31% jump, which would have been enough to send its stock price soaring. In disconnected market fashion, though, Mastercard stock has decreased over 13% in the past month.

This gap in earnings growth should not take away from what is a strong year for both companies. As a primary driver, transaction volumes increased by 9% at Visa and 11% at Mastercard. 

Double-digit transaction growth happens during a year when interest rates have more than doubled, and you can assume that the consumer gains strength rather than running out of steam, as some bears may claim.

Want to know how management knows this trend is still ongoing? Visa executives bought back as much as $12.4 billion in stock so far into 2023, $4.1 billion of which took place in this quarter alone and nearly 3% of the company's market capitalization.

At Mastercard, the view seems to be not too far off. Executives repurchased as many as 25 million shares during the quarter, for a total value of $7.2 billion and a similar 2.1% of the company's market capitalization in a vote of confidence.

Wall Street shares some of that future optimistic view from insiders, as analysts have cast their votes on just how much potential these two names carry today. 

With a $449.90 price target for Mastercard, analysts see a net upside of 23.7% from today's prices for your watchlist.

The weather at Visa is just as sunny, where analysts are bathing on their $276.60 price target, calling for a 20% rally to prove them right. Again, a giant like Visa advancing by that much is only proof of these companies' stability regardless of the business cycle.